4/21/2010 @ 6:00PM

Tracking Where China Invests

The People’s Republic of China will be among the world’s largest investors for a long time to come. Its official foreign exchange reserves are closing in on $2.5 trillion and its financial institutions hold hundreds of billions more. The bulk of this investment is in U.S. Treasuries and other U.S. government securities, but those bonds serve more as places to park the money than as valuable assets. To the extent it can, China over the next decade will increasingly seek to divert its horde of dollars and euros to nonbond investments at home and abroad.

Where? China is investing in shares of non-Chinese multinationals, in joint ventures with those companies and in physical assets such as coalmines. Chinese state-owned enterprises, especially, are interested in American financial companies and natural resources around the world.

Chinese outward investment will likely set a single-year record of more than $60 billion in 2010, but, as is often the case, official Chinese data on this investment are flawed. Publication is often delayed and always revised sharply higher. (See “Ten Myths About China.”) The data are also not useful in evaluating where the money is going: Beijing’s statisticians say that two-thirds of Chinese outward investment is into Hong Kong, but most of that money is merely routed through Hong Kong on its way elsewhere.

To inform American policy concerning China’s rise as an investor overseas, The Heritage Foundation created the China Global Investment Tracker. It includes $175 billion in transactions since 2005, when Chinese nonbond investment began to accelerate. The data set contains all confirmed transactions of $100 million or more, tracking spending to its final destination. The Heritage data set also includes engineering and construction contracts and a large subset of attempted investments that failed for a variety of reasons. Confirmation of a deal consists of a reliably sourced news story or a press release available to the public.

The Heritage data set confirms some conventional wisdom about Chinese investment while also revealing deviations from received wisdom. Growth was strong from 2005 to 2008, then the Great Recession brought about a small contraction in 2009. Beijing turned the green light back on in May 2009 and Chinese investment has remained vibrant since. In fact, March 2010 looks like the busiest month on record.

Energy investments took the prime spot, with more than $70 billion invested from 2005 through 2009. But China has been interested almost as much in metals, especially iron ore, investing more than $60 billion. The other main area is finance and real estate, at over $30 billion.

China’s hefty investments in sub-Saharan Africa have received deserved attention, but its investment in Latin America has been overblown by some. One reason is a common event in bilateral commercial transactions–grand announcements that never come to fruition. In mid-April Venezuela proclaimed a $20 billion oil-for-loans deal with China, but Caracas’ track record in this area encourages skepticism. China has little investment in the Arab world, which is perhaps surprising in light of its focus on energy, but it has sizable engineering and construction contracts there. Australia, at $30 billion, is the single biggest draw for Chinese investment. The U.S. is second at $21 billion, Iran third at $11 billion.

The places where the Chinese have invested most often are also the places where their investments have been most often thwarted: Australia, the U.S. and Iran, in that order. Failures stem from a variety of causes, such as nationalist reactions in host countries, objections by Chinese regulators and mistakes by the Chinese firms themselves. According to the Heritage tracker, the value of failed investments from 2005 to 2009 is a staggering $130 billion. Chinese investment could have been a full 40% larger than it was had the failed deals closed.

The dominant feature of Chinese outward investment, though, is its abundant potential. Barring another financial crisis or equivalent event, we can expect the Chinese to exceed $100 billion a year by the middle of this decade. That’s worth tracking.